NETGEAR Inc (NTGR) 2006 Q1 法說會逐字稿

Greetings ladies and gentlemen and thank you for standing by.

[OPERATING INSTRUCTIONS]

I would now like to turn the call over to David Pasquale. Please go ahead, sir.

Thank you, operator. Good afternoon, and welcome everyone to NetGear's first quarter 2006 results call. Joining us today from the company are Patrick Lo, Chairman and Chief Executive Officer, and Jonathan Mather, Chief Financial Officer.

The format of the call will be a brief business review by Patrick, followed with Jonathan providing detail on the financials. We will then have time for any questions. If you have not yet received a copy of today's earnings release, please call The Ruth Group at 646-536-7003 or you can get a copy off of NetGear's investor relations website at www.netgear.com.

Before we begin the formal remarks, the company's attorneys advise that today's conference call contains forward looking statements within the meaning of the U.S. Privacy and Securities Litigation Reform Act of 1995. The forward looking statements represent NetGear Inc.'s expectations or beliefs concerning future events and includes statements, among others, regarding NetGear's expected revenue, earnings, operating income and tax rate on both a GAAP and non-GAAP basis, anticipated new products offerings, current and future demand for the company's existing and anticipated new products, willingness of consumers to purchase and use the company's products, and ability to increase distribution and market share for the company's products domestically and worldwide.

These statements are based on management's current expectations and are subject to certain risks and uncertainties, including without limitation the following, future demand for the company's products may be lower than anticipated; consumers may choose not to adopt the company's new product offerings or adopt competing products; the company may be unsuccessful or experienced delays in manufacturing and distributing its new and existing products; telecommunications service providers may choose to utilize competing products; the company may be unable to collect receivables as they become due; the company may fail to manage costs, including the cost of developing new products and manufacturing and distribution of its existing offerings.

Channel inventory information reported is estimated based on the average number of weeks of inventory on hand on the last Saturday of the quarter, as reported by certain of NetGear's customers. Further information on potential risk factors that could affect NetGear and its businesses are detailed in the Company's periodic filings with the Securities and Exchange Commission, including but not limited to those risks and uncertainties listed in the section entitled 1A. Risk Factors, pages 10 through 20 in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2005, filed with the Securities and Exchange Commission on March 16, 2006.

NetGear undertakes no obligation to release publicly any revisions to any forward looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of anticipated events. In addition, several non-GAAP financial measures will be mentioned on this call. Information relating to the corresponding GAAP measures and reconciliation of the non-GAAP and GAAP measures can be found in our press release in the investor relations site at www.netgear.com.

At this time, I would now like to turn the call over to Mr. Patrick Lo. Please go ahead, sir.

Thank you, David. And thank you to everyone for joining us on today's call. Demand in the first quarter continued to be strong across all three regions, maintaining the momentum of the fourth quarter.

Company-wide first quarter net revenue increased about 16.8% to $127.3 million, compared to the year ago period. In quarter one, channel supply continued to experience constraints in our RangeMax 240 routers and cards in the U.S., and our Super G 11 GDSL 2+ gateways in Europe and Australia due to component shortage.

We expect component shortages will last until the middle of the second quarter, when our forecasted supply will finally catch up with the demand. The constrained supply of these three popular products negatively impact our Q1 [inaudible], especially in Europe. The key to our continued success is the excellent product line up we have developed and our robust product type line.

We are approaching our tenth anniversary in the strongest position our company has ever been in. We believe we have the compelling product line up, distribution channel, R&D pipeline and financial resources needed to build on our impressive track record of consistence, innovation and market access.

We introduced 11 new products in the first quarter, including the world's first stackable power over Ethernet smart switch. We also introduced our first voice over IP enabled DSL2+ gateway, and a UMTS wireless broadband Wi-Fi router for mobile operator trial. Importantly, we are excited that we were the first to ship Draft 11n-compliant Wi-Fi routers and cards early in the second quarter. This is just the latest technology that NetGear has taken a leadership position and given us important first mover advantage.

We have historically leveraged our first mover status into higher market share and profitability. We will continue to ship various models of Draft 11n-compliant products throughout the second quarter, including gigabyte versions and fast Ethernet versions of our Wi-Fi routers and adapter card, DSL2+ gateway and access points. We also intend to ship our exciting Skype Wi-Fi phone in the latter half of the second quarter.

In the business segment, we will introduce our first gigabyte stackable switch with 10 gigabyte uplink. We're happy to report that our RangeMax 240 received the influential LAPTOP Magazine and PC Magazine Editor's Choice Awards for fast throughput, superior range and ease of use.

Additionally, our Powershift Partner Program also received a five star vendor rating by CMP Media's [inaudible] Business Magazine, which reinforces our commitment to being a leader in the important IT distribution channel.

Revenue in the first quarter from service providers represents approximately 9% of total revenue, a sequential improvement over last quarter. We also recently added a few more service provider customers in both the UK and Eastern Europe, paving the way for continuous uptake in our service provider revenue percentage in the coming quarters.

In the first quarter of 2006, we added over 4,000 retail outlets around the world. We also expanded our value added reseller base to over 32,000 around the world. Sequentially, our North American net revenue increased 8%, while Europe, the Middle East and Africa or [inaudible] net revenue declined about 2%, and our Asia-Pacific net revenue grew 25%.

Comparing to quarter one of 2005, our North American net revenue grew 34%; [inaudible] increased 5%; and Asia-Pacific grew 10%. Overall, we are in a great position entering the second quarter, even though it is typically the industry's seasonally slowest quarter, as we expect to benefit from the ramping of new products and channel expansion in all three regions.

We expect continued market success of our new product offerings based on the overwhelmingly positive response from our channel partners and end customers. We're confident about our prospects for the coming quarter and year, and in our ability to build sales momentum.

We have a very strong new product pipeline in quarter two, and we expect to introduce more than 15 new products in this coming quarter.

Finally, concurring with our Q1 release, we also announced the transition of our CFO. Jonathan has been instrumental to me and our Board of Directors in guiding NetGear's spinout from Nortel Networks, developing the company's financial and operational infrastructure, taking the company public in 2003, and growing our revenues to $450 million in fiscal 2005. I personally would like to thank him for his dedication and leadership and wish him the best in his future endeavors as he pursues other opportunities, particularly those closer to his home base in Southern California.

While we'll begin an immediate search for a new Chief Financial Officer, Jonathan will remain in his current position through October 31, 2006, to ensure a smooth transition. We anticipate that this selection process will be completed prior to his planned departure.

Let me now turn the call over to Jonathan for details on our financials.

Thank you, Patrick, and thank you for your kind words. This was a difficult personal decision for me, giving how rewarding the position has been, how much we have accomplished. I've enjoyed my time here immensely.

With that said, as I reach my five-year anniversary with NetGear, I now look forward to pursuing other opportunities, particularly those that may be closer to my home base in Southern California. I've enjoyed working with our entire Wall Street community and will do my best to ensure a smooth transition.

Let me now provide a summary of the financials for you. We were encouraged by our financial performance during the first quarter of 2006, as we streamlined our product forecasting methodology and improved our inventory management system to better adjust for demand mix.

Unfortunately, due to the lengthening of lead time for certain critical components to arrange Max 240 and DSL2+ gateway, we were still not 100% to our supply target yet. There will be more work ahead in the coming quarter. We believe we will have good supply situation past middle of May.

Net revenue for the first quarter ended April 2, 2006, was $127.3 million, a 16.8% increase as compared to $109 million for the first quarter ended April 3, 2005, and an increase of 4.5% as compared to $121.8 million in the fourth quarter of 2005.

Net revenue in the first quarter of 2006 under the current geographical split method is about $56.4 million for North America, $56.8 million for Europe, Middle East and Africa regions, and $14.1 million for the Asia-Pacific region. Under the prior methodology, the regions were $64.6 million, $50.4 million and $12.2 million respectively. Please see our quarter one release for a full description of the methodologies used.

On unit shipments, we shipped a record 3.2 million units in the first quarter, representing about 7% growth over the fourth quarter. We shipped a record 2.3 million nodes of wireless products, representing about 5% growth over the fourth quarter. Total unit shipments of our Ethernet products such as hubs, switches and Ethernet network adapters increased approximately 11% in units and 9% in value.

Shipments of all wired and wireless routers, gateways combined declined about 5% in units to 1.2 million units and about 4% in value when compared to quarter four 2005. As mentioned below, the decline is due to supply constraints.

Moving on to the product category basis, the first quarter net revenue split between wireless and wired was about 61% and 39% respectively in revenues, compared to 60% and 40% for the fourth quarter 2005. The first quarter net revenue split between home and small business products was about 61% and 39% respectively, same as the fourth quarter of 2005.

Products introduced in the last 12 months [inaudible] about 31% of the first quarter shipment and products introduced in the last [inaudible] months contributed about 37%of our first quarter shipment.

Non-GAAP cost of sales for the first quarter came in at $82.6 million or 64.9% of sales, which compares to $73 million or 67% in the year ago period, and $83.6 million or 68.7% in quarter four of 2005. Non-GAAP gross margin first quarter of 2006, 25.1% compared to 33% in the year ago comparable quarter, [inaudible] fourth quarter of 2005.

Moving to non-GAAP operating expenses [inaudible] ending at $28.9 million compared to [inaudible] in year ago period and $24.3 million in the prior quarter. This was 32.7% of net revenue in the first quarter of 2006, compared with 1.5% revenue in the first quarter of 2005, 19.9% in fourth quarter of 2005.

Non-GAAP sales and marketing expenses were at $20.4 million, which compared to $16.9 million in the year ago period and $17.7 million in the prior quarter. A percentage of net revenue, sales and marketing [inaudible] percent, compared to 15% in quarter one of last year and 14.6% of prior quarters. We performed more sales and marketing activities in quarter one on the brand activity, such as trade shows and media advertising, but less on [inaudible] revenue items such as streaming.

As a result, we had higher gross margins, but also incurring higher sales and marketing expense when compared to the prior quarters. R&D was up to $4.3 million from $2.8 million in the year ago period and compared to $3.2 million in the fourth quarter of 2005. This represents a 3.4% of net revenue in quarter one of this year and 2.6% for quarter one of 2005, and 2.6% for quarter four of 2005.

As we mentioned in our prior quarter earnings discussions, we intended to boost our R&D spending in the first half of 2006 by 20% to invest in multiple exciting new technologies such as 11-n wireless and Skype phones, and we have built a new software lab in Beijing, China.

Now, we have R&D capabilities in three technology hubs of the world, Silicon Valley, Taipei and Beijing. G&A expenses in the first quarter were $4.2 million or 3.2% of net revenue, compared to $3.6 million or 3.2% of net revenue in the year ago period, and $3.4 million or 2.7% of net revenue in the fourth quarter of 2005.

As noted last quarter, we were setting up our new Ireland International Operations Center. The setup costs will be reflected in higher G&A costs in the first half of this year. We expect G&A costs in Q2 to be picking up slightly further to reflect more hiring and consulting costs in our Irish operations.

Operating income on a GAAP basis which includes non-cash stock based compensation expense of $825,000, came in at $14.9 million, compared to $12.2 million in the year ago first quarter and $13.5 million in the fourth quarter of 2005. This continues to trend of our positive, sequential operating income growth.

Net income. On a GAAP basis, the company had net income of $9.9 million or $.29 per dilute share for the first quarter of 2006, compared to a net income of $7.9 million or $.24 per diluted share for the first quarter of 2005, and $8.9 million or $.26 per diluted share in the fourth quarter of 2005.

Non-GAAP net income for the first quarter of 2006 was 10.5 million, a 28% increase, compared to non-GAAP net income of $8.2 million for the first quarter 2005 and a 15% increase compared to non-GAAP net income of $9.1 million for the fourth quarter of 2005.

Non-GAAP net income for the first quarter 2006 excludes non-cash stock based compensation, net of tax of $672,000. Non-GAAP net income for the first quarter of 2005, excludes non-cash stock based compensation, net of tax of $313,000 at 238,000 in the fourth quarter of 2005.

Non-GAAP net income was $0.31 per diluted share in the first quarter of 2006 compared to $0.25 per diluted share in the first quarter of 2005 and $0.27 in the first quarter of 2005.

Non-GAAP tax rate was 39.5% in the first quarter of 2006.

Moving on to the balance sheet, we ended the quarter, we ended the first quarter with 178 million of cash or approximately 5.22 -- $5.22 per diluted share in cash, cash equivalent or short-term investment. Up from a total of 133.2 million at the end of the fourth quarter, or approximately $5.05 per diluted share.

In terms of inventory [pens] we ended the first quarter of 2006 with inventory at $44.9 million with turns of 7.4. a record level for us and an improvement from 51.9 million with turns of 6.5 at the end of the fourth quarter 2005. and 47 million with turns of 6.2 at the end of first quarter 2005.

[Here so] there is sales outstanding was 77 in the first quarter of 2006 compared to 77 days in the fourth quarter of 2005 and 67 days ended in the first quarter of 2005.

US retail [tal] inventory end of the first quarter 2006, higher than 9.3 weeks due to the stocking of new store outlets, RadioShack. This is compared to 7.5 weeks in the first quarter of 2005 and 6 weeks in the fourth quarter of 2005. US distribution channel inventory ended in the first quarter of 2006, 5 weeks as compared to 4.3 weeks in the first quarter of 2005 and 4.4 weeks in the fourth quarter of 2005.

European distribution channel inventory ended in the first quarter of 2006 at 5. - approximately 5.2 weeks. As compared to approximately 5.2 weeks in the fourth quarter of 2005 and 4.5 weeks in the fourth quarter of 2005.

[Asia past week] distribution channel inventory ended in the first quarter 2006 at approximately 4.1 weeks as compared to approximately 4.6 weeks in the fourth quarter of 2005 and 4.6 weeks in the first quarter of 2005.

Total assets were 357.5 million at the end of the first quarter 2006, compared to 356.3 million at the end of the fourth quarter of 2005 and 287.3 million at the end of the first quarter 2005.

Deferred revenue increased to 7.7 million as compared to 4.3 million at the end of the prior quarter and 3 million at the end of the first quarter 2005.

Now, let me make a comment on the second quarter 2006. we expect net revenue of the second quarter 2006 will be approximately $125 million to 130 million with non-GAAP operating margin in the range of 11% to 12%.

Finally we expect the non-GAAP effective tax rate to be approximately 39.5%.

Operator, we now will be happy to take any questions.

Certainly.

[OPERATOR INSTRUCTIONS]

Our first question comes from Samuel Wilson with JMP Securities.

Hi this is Jonathan Curtis for Sam Wilson. Just a couple of questions on the component shortages. What components are you guys struggling with the most?

Well, I mean the components that we're struggling the most with is our broadband chips for the DSL and also there's some specialized high end radio frequency components so those are the ones that are in the shortest demand - shortest supply.

And it seems like you guys have more confidence coming into the second part of the quarter here. Have you already seen those - that stock coming through or do you - more based on commitments from the vendors of the -

Certainly its based on the commitment from the vendors and as we mentioned last quarter that some of the chip suppliers are lengthening their lead time, but right now they're committed to the deliveries and we're seeing continuous up tick in the supply so we feel pretty good about middle of May when the component supply will be catching up with our forecast supply.

Okay, and then just one more quick question here on the Skype Wi-Fi phone, I see you guys - or that pre-orders are now being taken with Amazon. Is Amazon going to have an exclusive sales opportunity here or will you be selling this through your other retail channels as well and how is interest then in those other retail channels?

Certainly we are taking the pre-orders primarily right now through the online channels and we will gradually expand the availability through the other channels as well as we approach the actual ship date.

Okay. thank you very much.

Sure, my pleasure.

Our next question comes from [Jung Chow] with Lehman Brothers.

Thank you very much. Hey guys congratulations on a great quarter. Jonathan good luck with your future plan.

Thank you.

Thank you Jung.

I have a few questions. First is a clarification, Patrick the component supply issue in the March quarter was different from the other manufacturing capacity kind of trends you saw in the September/December quarter.

That is correct. That is correct.

Okay great. The second question is on your expectations for the channel inventory as you exit the June quarter, what do you think that may trend? I see some perhaps a little bit, tad higher than your target some [inaudible - accent]. What do you think overall all the different channel inventory will transfer the quarter.

We believe - we're planning for a tad higher. Actually the fact is the 11 end products and the Skype phone are going to continue to ship, especially in even bigger quantities in the second half of the quarter. And then we expect our channel partners to really pick up on those new products, anticipating a very robust back to school season. So in the normal course of things we would expect the channel inventory to tech up a little bit at the end of the June quarter.

However, the sell through actually remained very, very super strong, beyond our expectation on those new products than it might be depress the channel inventory, but as far as we're planning, w e expect the channel inventory to be a tad higher.

You and - I know Jonathan mentioned for the US retail it was largely due to RadioShack, but even for the US retail, you think it may still go a tad higher for US retail?

That's correct. That's correct.

Okay. Jonathan, could you please - I heard you talk about the country revenue, the allocation between some rebates and the market expense, could you please remind us the list of items that are country revenue and the list of items that are - that [CMS] marketing expenses.

Okay, first of all, on the contra revenue between shipment and net revenue there are 3 items mainly. Returns and allowances, we make a reserve for expected warranty and stock rotation returns. Price protection that we provide, we drop prices to our channel inventory. And see the large component is marketing contra revenue. Under the EIPF ruling, all market expenses by default to contra revenue unless you can show the receipt to a third party and you got value etc, so as an example, marketing - mail in rebate, instant rebate is a large component. Corporate in advertising, MDF. End caps, we pay our resellers are examples of items in contra revenue. If you run a newspaper advertisement where we pay the newspaper or television advertising we pay the television (inaudible). Those will go under the training of the sales staff we get some outside (inaudible) also going to operating expense.

Okay.

So yes, trade show is another big one. Sorry about that.

Trade show is in the sales and marketing, right sure. Okay. and now given - looks like the gross margin dipped down to 31% for the fourth - for the December quarter, now it bounced right back of 35, so as you go forward, I know in the past you have talked about not to focus on the gross margin just from the modern perspective do you think this is sort of the stable level you want to keep at?

You know again, we prefer not commenting on that, just to remind you, in the fourth quarter you would remember we said freight was a factor, right? And then the contra revenue on marketing expense, the rebates, that was a factor. So our advice is focus on the operating margin because that's what we focus on.

Right. Okay, last question, very quickly. Just on the tax rate, I know Jonathan you have been working on lowering the tax rate, sort of a 3 to 5 year plan. What's your expectation for the tax rate for 2006 and 2007.

Yes, I mean today you heard on the news the R&D tax credit, the legislation has been postponed, right? So that's why we are giving you recommended rates for the next quarter at 39.6%. again, by the year 2006 our recommendation for your modeling purposes is to use - because we don't know about the R&D tax rate, is to use what we have shared with you for the first 2 quarters, maybe a tad lower. Okay? but its in 2007 that you're able to see a small drop on the tax rate because of our [ibis] structure. As we always said, its 4 years out there will be a big drop.

Okay. great. Thanks a lot guys.

Thanks Chow.

Our next question comes from Alex Henderson with CitiGroup.

I've got a couple of questions for you, first one's on the interest line, why did the interest income jump more than double sequentially and what do you expect that to do sequentially going into the second quarter?

In the past Alex, currency exchange in the prior quarters, we were hit by the interest as we have more cash and the interest rates go up we will benefit, but its offset by currency exchange. This quarter as you know, with the dollar weakening, compared to the prior quarter, we had a - on a currency gain of just 60 odd thousand dollars, compared to prior quarters we would show a book loss of $6 to 700,000. that was the swing.

So -

Can't predict currency and I wouldn't attempt to predict it going forward and we don't provide guidance on that.

So if we assume a flat currency, which I think is the only reasonable assumption, it would then be essentially 1.6 straight across then.

Internally, we use based on historical interest could mean the 1.5, 1.6 million, but I would put some currency loss, we like to be conservative.

Okay, so assume a little bit of a loss just to put a buffer in it, but generally, if the currency was flat it would be 1-6.

Okay, second question, I'm a little confused about your comment about RadioShack. Presumably RadioShack is not carrying inventories that are higher than the rest of the industry so why would the stocking of RadioShack necessarily cause an increase in the overall stocking levels?

Well, let me take on this one. Is our weeks of stock is calculated on the prior 6 weeks average weekly sell through.

I see.

So when you enter a new chain, your sell through has not been rammed up and actually slowly and especially when you don't have a full 6 weeks then your average is lower. So that's why it would have a negative effect -

Okay, that makes sense. So what percentage of your North American footprint does that inventory represent?

For competitive reasons we do not disclose channel specific inventory levels.

Is it reasonable to think that that's 10% of your footprint?

As I said, I wouldn't comment on it - otherwise our (inaudible - talked over) would know it all.

Second question, can you give us some sense of what's going on with comparable store shelf space, its my impression that the number of competitors is gradually being trimmed by most of the channels and that you're gaining more SKUs, can you talk about SKUs per comp store and shelf space per comp store?

Generally speaking, our shelf spacing is a little bit higher than our market share. And when you look at the most popular stores like Best Buy and [Price] Electronics, Circuit City, Comp USA, we're typically would have anywhere between 30 to 40% of the shelf space.

So is it stable or improving?

Its gradually improving while the little guys got chased out.

Okay, second set of questions. I didn't catch the comment about the service provider segment in the quarter, can you remind me what that was?

The service provider revenue in this quarter, in the past quarter in Q1 represented about 9% of our total revenue as compared to 8% the prior quarter.

And its still well down from the 13 that it peaked at. Can you talk about what might drive that back up?

As we mentioned in the call just now, the way to drive it up is to get more customers, to get more products going out, and as we just mentioned, we believe that with the new products and customers we just acquired, we believe that it will continue to pick up.

Okay and another couple just technical questions. You made a comment, I thought I heard you say that you expected to increase R&D expenses by 20%. Are you talking about second half, year over year or from 20% from the first quarter level, I wasn't clear?

Basically what we said was that we would add 20% on top of our normal level. Our normal level of R&D is somewhere always at a 2.8% of our revenue, but now we're boosting it by 20% so you would expect that our R&D is more in the 3.5% level.

Which is roughly where it was in the quarter.

Right.

Okay, and then on the T&A, increases sequentially, is that a step up and then flattened out kind of equation there?

Yes, in the first half of the year, couple of things. If you're comparing it to quarter 4, Alex?

Well, you'd made the comment you were opening some facilities in Ireland.

Yes, in this year, in the year, there is investment spending in recruitment fees, opening new facilities in the Ireland operation that we talked about before. The - we're setting up our [shed] services in Ireland.

Right, so I - what I guess what I'm asking is is that a step up and then a flattening or will we see a continuous ramp?

We see stepping up, as we just said, and maybe a flattening with as light growth as we keep improving the systems etc.

Yes, last question and then I'll cede it to the next questioner. The pre-end to end transition. You had a competitive advantage due to single radio versus multiple radios that your competition, the pre-end, the end you don't have that advantage I'm presuming going forward. Is that a correct assessment? Is the margin on that product a little tighter than it was on the pre-end product?

We do not agree. If you read our product announcement and press release carefully, you will see that we are probably the only vendor that is actually volume shifting gigabit version of the 11 end products.

And also, if you look carefully into the announcement, we actually incorporate some proprietary technology. One is called steady stream and the other one is actually a proprietary testing and manufacturing process we call the 11 end true test. I think those are very unique to us and enable us to continue to perform at a higher level in throughput and range versus our competitors.

The question was on the cost of components though.

When you are - and this is if we have higher performance then we should be able to command a premium.

I understand premium pricing because high performance. Okay thank you.

Thank you.

Our next question comes from Ryan Hutchinson with WR Hambrecht.

Thanks a lot. Doesn't leave many. Lets start with going back to the carrier business here. Color on the comments you make Patrick about some new potential new large carrier wins here and expecting to be up sequentially. Can you add any insight there in specifically in what geographies or -

I think I made it in my discussion is actually in the UK and in Eastern Europe.

Okay fair enough. And just an update on storage central in terms of your expectations, how is that tracking?

It is tracking. I mean we finally get up to the supply level that we would like it to be. And we're selling thousands of them every week. So we are very satisfied with it and be prepared that we would now to proliferate the number of models under that product line.

Okay great. And then finally, and I'll jump back in the queue here, headcount, I missed that.

The headcount, actually we didn't quite mention it. the number of headcount is 343 right now. About 4.5% growth over Q4. which is exactly in step with our revenue growth.

All right. Great thanks guys.

Pleasure.

Our next question comes from Maynard Um with UBS.

Hi, this is [Tom Lee] for Maynard. A couple of questions, first one I was wondering if you could tell us what the warranty provision balance was at the end of the quarter?

What you will see in the 10-Q, but let me give it to you right now. The end of quarter one, warranty reserve was 11 -- sorry, 12 million 614.

12 million 614, okay, great. And then was wondering if you could give us a little color on the different regions and if you look at kind of your growth rate last year, it looked like EMEA was really strong, ex-Germany, and you saw a little bit of slowdown in North America. But then when you -- in the results that you reported this quarter, it looks like you saw strength in North America. Obviously, with the supply constraints the EMEA was soft. Was wondering, like, once you get through the supply constraints, can we expect to see kind of growth rates similar to what we saw -- similar to what we saw last year or is there any regions particular maybe where we could see some upside, particularly [inaudible] or North America or in Europe?

We continue to expect that Europe and Asia will outperform the U.S. on a sell-through basis and it is still the same in the last couple of quarters. And we still think that not only we continue to widen the gap between us and our competitors in the market we already dominate, like in the UK and like in Germany, we actually are making tremendous progress in the new markets that we went into in the last two years, such as Italy, such as [inaudible], such as Spain, such as Eastern Europe. We're very encouraged and they will continue to fuel our growth. And in Asia, needless to say, we're very excited about our progress in China. And according to [IDC], as a matter of fact, we're now the number one wireless network vendor in China. So we're very encouraged with our position over there and that will continue to fuel our growth.

So then you don't see -- I mean you don't see a slowdown occurring in Europe and you see that kind of continuing where you've been possibly increasing from the growth you saw last year?

Absolutely. And as our sequential decline is so minimal in Europe, even with our short supply, while the market is traditionally down quite a bit from Q4 to Q1 we're very encouraged with our position in Europe.

And then just quickly in the U.S., is there -- can we -- do we for expectations more or less similar to what we saw in '05 or do you think there is some upside there?

U.S. is a little bit more mature market --

Right.

-- and because the market share status is pretty steady in the U.S. right now, so we expect that U.S. we will continue to slightly outgrow the market. The market is expected to grow in the U.S. somewhere around the 13% range and we believe that we can outgrow that slightly.

Okay, great. Great, thank you.

Our next question comes from Brantley Thompson with Goldman Sachs.

Hi, it's [Natalie Hadate] for Brant. I was wondering if you could talk a little bit about how you plan to define the pace of innovation over the next 12 to 18 months given the increased marketing costs that are associated with maintaining such a broad product line? Do you think you need to alter your strategy from releasing so many new products, as you have historically done, towards working on releasing fewer, more focused, kind of sure-hit products and how do you balance this when you are setting your R&D budget? Thanks.

We believe that we maintain a discipline of maintaining about 100 active products on the shelf and that magic number really hasn't changed over the last three, four years. And however, we continuously revamp those 100 products so when we introduce the 11 new products, we retire 11 old product. That has been in the works and it has worked like a clockwork inside our internal processes from engineering, manufacturing and marketing, and we intend to keep it that way. Even though we are going into some newer applications, we believe that magic number of 100 is about right.

Thanks.

Our next question comes from Mark Sue with RBC Capital Markets.

Thank you. Jonathan, I hope we're not driving you away.

Oh, no. Hey, Mark, I'm waiting for the donuts.

Question is we recognize that you are getting better at predicting supply. What about your ability to predict demand? And maybe from a regional perspective, maybe from a product perspective, are we at a point where revenue consistencies are largely behind us and you're getting very good data to predict demand and your guidance kind of reflects that?

Maybe I'll take on this one, Jon.

[inaudible]

So we instituted the [foresight-forecasting] tool at the regional and product level and we've seen some initial results. But again, this is an ever improvement process. We can never be [bare]. I mean it's like the six sigma process, like the [Kaizan] system in Japan, you will always continue to make improvement. There is never an end game and the better we can improve, then the better our margin and our revenue going to be.

Got it. And then maybe, Jonathan, deferred revenue growth, any thoughts on what's driving that?

Again, [inaudible] deferred revenue, as we talked about before, is when can you recognize revenue on a -- [following] the FAS104, et cetera, if we get product in little late, by the time we ship it to our customers will they get it on time that we can recognize that revenue? So in this quarter we had some of those challenges that caused the deferred revenue to go up.

Okay. And Patrick, lastly on the Skype phone, is that something that we should -- what should we assume in terms of units for maybe the -- for the year and for the competitors that we should watch, is it kind of [inaudible - background noise]?

I would love to see -- I would love to know that number and I think my competitors would love to know that, too. We're not going to make any prediction on that yet. We are going to enjoy the exclusivity as much as we can and after that, we will see who will be our competitors coming onboard. And certainly we have seen some Taiwanese vendors claiming that they have a phone, but as far as we are concerned, we are the only exclusive partner and we will enjoy as much as we can during that leadership position.

Okay, that's helpful. Thank you and best wishes, Jonathan.

Thank you very much.

I've got still seven months or so.

Our next question comes from [Eric Suppiger] with [Pacific Gross Equities].

Good afternoon. Congratulations.

My pleasure.

On the R&D front, so it'll be about 3.5% in June quarter. Is that the range that we should be modeling going forward or when you had talked about it you had just talked about it for the first half last quarter? What are the thoughts in terms of the continued investments on the new lab?

That would be the first half. We intend that as we go through the year and it would trend back down to our traditional level, which is more like 3%-ish.

Okay, but not right away, in the September quarter that might phase down to 3% over the second half?

Again, like putting a brake on a car at the red light, it has to ramp slowly downward.

Okay. And then secondly, you're projecting 11 to 12% operating margin in Q2. Why do you -- if I take the midpoint of that range, it's down a percentage. Why do you anticipate 90, 100 basis point decline?

As we mentioned in the last quarter discussion and just now, we are investing extra in R&D as well as extra in the Irish operations and that's what's driving the difference.

On the R&D front, that's not going to be significantly more. Is the Irish operations making a significant difference in terms of the margin?

There is multiple angles to look at that. Certainly the Irish operation is one factor. And then we will continue, as we just mentioned now, we're going to introduce more than 15 products in the second quarter. Certainly that [inaudible] R&D expenses and certainly if we are at the high end of our guidance of revenue, then we'll be more towards the 12% and if we're at the low that would be more towards the 11%.

Okay, very good. Thank you.

We have a follow-up question from [Samuel] [inaudible - background noise].

Yes, I just have a quick question on your decision to go into RadioShack. Are there a particular set of products that you'll be offering through RadioShack that it's somehow different markedly from maybe what you offer through a Best Buy or a Circuit City or will it just be pretty much like any retail outlet?

It is certainly not like any other retail outlet. As you probably have visited a RadioShack store, it is very cozy, small format, and they generally will sell the things that most people know and want. So we put the most popular wireless router and [inaudible] of very affordable price range in that store and we put in a very strong sell-through plan together with them. And based on the initial few weeks of sell-through, we are very encouraged.

And [inaudible] RadioShack's throughout the country or is this in just a couple of select regions?

We have total of about a little bit over 3,000 stores in the whole setup to carry our product.

Okay, great. Thank you.

Gentlemen, we have no further questions.

Great. So I just would like to say a few words. [inaudible] everyone to join us every time and support us along the way. And I would like to take this opportunity on behalf of the Board as well as you all, the investment community, to really thank Jonathan. He has been a great friend, a great coach, a great advisor to me, and we certainly are not really happy to see the loss. We do understand that Jonathan's personal [toll] that has been going on for the last five years, [commuting] every week from Southern California, and we really would like to wish him every success and happiness in his new endeavor in Southern California.

Thank you, Patrick. Again, sounds as though I'm leaving tomorrow. No, not at all, I'll be here through end of October. I'll be on these calls. I hate to go. I love this company. But the toll of taking flights every day, leave Monday morning and getting back on Friday night. Thanks, everybody.

Thank you, everybody. Good evening.

Ladies and gentlemen, this concludes today's conference. Thank you all for your participation. You may disconnect your lines at this time.